Uber Creates Either a Revolutionary new Financial Model or a Fleit of Fancy

While Uber sold its Advanced Technology Group, effectively ending its original autonomous “robotaxi” plans, the financial model they created could still be use by other companies. It is also incorrect to say that Uber turned away from autonomy entirely. As its ride-hailing service lost customers during the pandemic, its food delivery service UberEats gained customers. I discussed other companies like Nuro focusing on last-mile delivery of gods and groceries in my book, The Future is Autonomous, and this trend was already popular befoe the COVID-19 pandemic and has exploded in popularity since.

After failing to purchase UberEats’ main competitor in the US, GrubHub, Uber purchased sidewalk delivery robot company Postmates. These robots are not fully autonomous and need teleoperators to drive them. They do offer significant advantages to reduce human contact during the pandemic for risk of infection for operating in secure areas, such as work zones, college campuses, and pedestrian areas in cities, such as parts of Pasadena, California.

Uber Debates How it Can Become Profitable

Khosrowshahi spent his first year after taking over as CEO of Uber defensive driving. He had to deal with the scandals of his predecessor, the lawsuit, and the fatal collision. He was not in a position to put his foot on the accelerator and make statements about the imminent arrival of autonomous vehicles, nor is that his temperament.

He said the main difference between Musk’s approach of predicting the arrival of autonomous vehicles as early as 2020 and his would be the expected timing. Khosrowshahi said it could be five to ten years before autonomous vehicles are mass produced and deployed. The question would be how long Uber could keep funneling research and development money to develop autonomous vehicles, given their already precarious financial situation.

I spoke with a vice president of an insurance carrier about issues related to insuring autonomous vehicles. Talking about autonomous vehicles, she said, “I don’t know how quickly this will be a norm in society.” She did leave the door open for them to arrive on the roads in some capacity, saying, “I do think that there are plenty of people who will sign up for these types of vehicles, (but) they are going to be expensive vehicles.” She added that ultimately it would also depend on where people live. The initial use case, because of the increased price tag, would likely be autonomous taxis. Therefore, Uber would face increased competition, assuming every other autonomous vehicle company used the taxi model for an initial roll-out.

Khosrowshahi did discuss the pressure of developing a safer vehicle alternative because of the nearly forty thousand deaths every year related to traffic accidents with human drivers in the US alone. The status quo could not continue, but he did mention those type of numbers for a robot driver would not be tolerated. Like Elon Musk, he did make a similar grandiose sounding prediction when he argued autonomous vehicles are “part of the solution” to ending individual vehicle ownership in the US. He only lacked the timetable Musk frequently adds to his statements. This was a remarkable statement considering the US has over one hundred years of individual car ownership.

Khosrowshahi’s primary task as CEO of Uber would be to make Uber profitable. Uber has had quarterly losses practically from the moment it was founded. According to a study by Reuters in 2017, Uber customers paid only forty-one percent of the actual cost of the trip. The report was conducted after Uber released some financial documents as a then-private company. Uber had losses of $708 million that quarter.

With a $1.3 billion loss in the third quarter of 2019, it had gotten worse instead of better. Part of the problem is subsidies Uber offers to first-time users of the mobile app, and occasionally offers to long-time users as well. Uber also faces increased competition for its ride-hailing platform from Lyft, and from GrubHub for its food delivery app, UberEats.

Khosrowshahi is, first and foremost, a businessman and deal maker. After he joined Uber, Khosrowshahi focused on cutting costs. Uber sold operations in Russia and Southeast Asia for stakes in local ride-hailing services in 2018. Uber did the same thing to Uber’s food delivery business Zomato in India in 2019. India was Uber’s most costly delivery market. The cuts continued in 2020 when Uber closed food delivery services in seven countries and fired three thousand seven hundred people around the world.

Uber’s already tenuous financial situation has taken a significant hit during the COVID-19 pandemic. Uber’s ride-hailing platform suffered greatly in 2020 with the company’s revenue falling twenty-nine percent from the second quarter of 2019. People travelling less and fear of contracting the coronavirus can explain the substantial drop in the ride-hailing platform. While the ride hailing service has slowed, UberEats food delivery service has thrived. Revenue from the UberEats food delivery service has more than doubled from May 2019 to May 2020 to $1.2 billion, as opposed to only $790 million for the ride-hailing platform. This was the first time the food delivery platform outgrossed the ride-hailing platform since UberEats was first created.

Khosrowshahi made a name for himself at Expedia for being an effective dealmaker and making purchases. When he ran Expedia Group Inc. for more than ten years, he completed forty-one transactions worth $12.7 billion according to data collected by Bloomberg. He then reverted back to this formula when facing a steep decline in ridership for Uber’s ride-hailing fleet by attempting to purchase Uber’s main competitor in the food delivery industry: Grubhub Inc. This announcement of negotiations between Uber and Grubhub was criticized by officials, one of whom called it “pandemic profiteering.”

Uber was unable to secure a deal to buy Grubhub, however, and it was sold to Dutch food delivery company JustEatDelivery for $7.3 billion on June 10, 2020. This was a blow to Uber, which hoped purchasing Grubhub would grant it the clear market share lead in food delivery services in the US. However, Khosrowshahi was not finished. He purchased startup Postmates, the tele-operated delivery robot company for $2.65 billion on June 29, 2020.

Even while Khosrowshahi strived to increase UberEats’ food delivery profits by buying other companies, he never lost sight of his goal to create a fleet of autonomous “robotaxis” to maximize the profit from Uber’s ride-hailing platform. The additional cost of autonomous vehicles is a problem every company in the industry must face. Other companies use different methods for reducing the cost of autonomous vehicles, which are discussed in other chapters in this book. Khosrowshahi’s financial skill and experience led to Uber creating a revolutionary, but risky, new investment plan.

Khosrowshahi Creates an Innovative New Financial Framework for Robotaxi “Fleits”

Unlike Didi in China, Uber does not actually own the vehicles in their ride-hailing fleet. To get around the problem of actually owning the fleets of autonomous “robotaxis,” Khosrowshahi needed to use his investment experience to identify a solution to this problem. He argued for a system that industry experts have nicknamed “Fleits.”

Fleits are car fleet investment trusts. This is a variation of Reits, which are real estate investment trusts. Reits own three trillion dollars in property assets in the US alone. Under this investment system, investors would get a share of the fast-growing sector’s profits and also a possible tax incentive, such as the one given to Reits. This share had to be negotiated ahead of time but would be approximately six per cent funded by the cash flow generated from rides.

Uber would not be responsible for actually owning the fleet of vehicles. The vehicles would be provided by an auto manufacturer and Uber would mainly be responsible for vetting the autonomous software developers of the Fleits companies. This would be similar to the current vetting process for human drivers, which has become substantially more stringent following the fatal collision. However, it would still mean Uber would have to hire and retain a skilled staff of trained computer engineers to effectively judge the quality of different automated driving systems.

For Uber this sounds like the ideal scenario for its autonomous vehicle fleet. However, many challenges make this strategy less attractive to investors in the Fleits. The vehicles would depreciate rapidly, especially if they are used all day and night to maximize profit by having as many rides as possible. Also, if there was no human driver, there would be no one to prevent customer behavior that could damage the vehicle. Having a camera directed at the interior of the vehicle could reduce the risk of people damaging the vehicle. However, that raises privacy concerns about who is watching them and whether this footage will be stored or shared.

The cameras facing the interior of the vehicle might not be much of an issue from a legal perspective. In my talk with the vice president of the insurance carrier, I asked her about the potential risk to a person’s privacy if the vehicle is being used as part of an autonomous “robotaxi” fleet. She said, “There’s pretty strict privacy laws and data storage laws like when companies start to collect information and store information. There are some pretty strict rules and regulations that people have to abide by.” Therefore, the cameras could mainly be used for short duration storage or to serve as a warning for riders to behave appropriately in the vehicle.

One issue would be if there was an accident and there was information about the vehicle used for the trial. In this case, she said, “They have to give certain information about the person and that could potentially be an issue if the person is not okay with sharing information.” It all depends on the accident. If the person thinks the issue was the fault of the vehicle, then they would want the vehicle manufacturer to share the information. However, if the vehicle manufacturer believes there was a problem with the passenger then they would want to have that information shared. This would most likely require clarification in future legislation, she said.

Individual passengers are not the only people who will need to worry about liability under this new system. Owners of the vehicles would also be subject to potential liability concerns for accidents involving their vehicles. While insurance would diminish the risk of each individual accident, the premiums would increase. These premiums could skyrocket if there are many accidents in which it is deemed the autonomous vehicle was at fault.

While the Herzberg family chose to sue Tempe, Arizona and not Uber, the question of civil liability still has not yet been resolved. Both Uber and vehicle manufacturers could possibly be held liable and be subject to lawsuits in the future. This would include potential liability risk for investors in the Fleits. Unfortunately for Uber investors do not like risks and uncertainty, and this plan contains both.

Uber has already begun to seek investors for its autonomous vehicle Fleits. One year before it went public, Uber received a five hundred-million-dollar investment from Toyota for its autonomous vehicle division. Uber went public on the New York Stock Exchange in May 2019 and it was one of the biggest IPOs of the year. A few weeks before Uber went public, they received a billion-dollar investment from the Japanese bank Softbank and other investors.

Khosrowshahi has bet everything that, by taking the driver out of the picture, this would make Uber profitable. Turning to a radical financial model of autonomous vehicle, Fleits represents his riskiest bet yet. The only other option would be to form a partnership with fleets of autonomous vehicles from a vehicle manufacturer for Uber to purchase its own vehicles. However, this would be expensive and would not necessarily be the easiest route to profitability. Khosrowshahi needs to stop defensive driving and step on the accelerator to gain the needed investors for Uber to start its Fleits, sooner rather than later given Uber’s financial woes.

Hiring Khosrowshahi when they did was the right choice for Uber. He knew how to handle adversity from the days of his forced exile from his home country in Iran. He showed resolve in changing the company’s work culture after the scandals of his predecessor. His handle on the media right after the fatal crash which killed Elaine Herzberg left much to be desired. However, his response to completely change the organizational structure and work culture to focus on a “safety culture” was admirable. Realizing I only found out about these changes over two years later from a speech given at a paid symposium does identify issues with public relations and dealings with the media which should be addressed. People need to be aware of the positive changes the company has made since the accident.

Uber’s greatest risk could be a tremendous benefit for autonomous vehicle companies in their initial push to form autonomous “robotaxi” Fleits. This would be a tough sell to potential investors. However, this would mean substantial cost savings and could possibly create a revolutionary new financial model for the industry.

With Uber as the world’s leading ride-hailing app, the autonomous vehicle industry in the US is hoping Khosrowshahi’s bet on autonomous vehicles succeeds. Not just for developing autonomous vehicles in the US, Uber’s global reach presents opportunities to extend America’s advantage abroad. This is where the next stage of the autonomous vehicle competition will begin and where the winners will be decided between the US and China. The first step is finding willing financiers in the US.

If you are interested in new business or financial models for autonomous vehicles, policy problems for regulating AVs, or the technology competition between the US and China over this new technology, then read my book The Future is Autonomous from the link below! Coming soon, the book will also be available in hardcover with a new Foreword!

Here is the book on Amazon: https://www.amazon.com/Future-Autonomous-China-Develop-Driverless-ebook/dp/B08PVRL38J